by
AnalystModern economics provides new insights into human behaviour. The classical
economists based their analysis on the assumption that man was selfish and
self-interested. He would also act rationally in choosing alternative means to achieve his
goals. Economics does not rule out non-material goals and hence accepts that a person can
pursue spiritual goals too, but assumes even in the pursuit of such goals he will act
rationally in deciding between preferences.

Sociologists have observed that more and more people are oriented towards material
goals like seeking pleasure from the purchase of goods and services. There has been a
decline in moral values throughout the world and people have become increasingly oriented
towards materialism and material goals in life. We may lament about it but have to be
realistic and accept it as a fact of modern life although religious men should undoubtedly
seek to reverse this tendency as it is not in accordance with mans deep-seated quest
for spirituality.

Self-interest and policy

If people are taken to be increasingly selfish and self-interested, then only measures
that appeal to their self interest should be adopted to influence their behaviour in
directions that we regard as desirable. This should be the objective of policy. Appeals to
moral values and the good sense of individuals dont seem to work in our society
today. The economists have in the last three decades obtained very useful insights into
human behaviour through such analyses as conducted by the Nobel laureates Gary Becker and
James Buchanan. They advocate the provision of incentives to make people act in ways
desirable for society and disincentives to deter them from acting against the social
interest. If it is to their advantage, people will co-operate in activities whether they
are to steal or to invest or engage in some economic activity or other.

Collective interests and individual motivations

It is said that at the beginning of the 20th century goods in China were transported by
barges. A team of six men, who were rewarded handsomely if the goods arrived in time,
pulled each barge. If they did not keep the deadline, they got nothing. Each man in the
team calculated that success would depend on the efficiency of the other five members and
if everyone else pulled hard, he could shirk and still benefit. On the other hand, even if
he pulled hard there would be no success if the others did not. Since everyone would make
the same rational calculation and all would shirk ensuring the non-arrival if the goods in
time, nobody would get paid.

How did the team solve its problem? They hired a seventh person whose job was to whip
the shirkers. (From "The Armchair Economist" by Steven Landsburgh.) This
illustrates the problem of getting people to co-operate in their common interest. This
problem arises in a cartel arrangement such as the OPEC, which seeks to keep the price of
oil up by fixing production quotas for each producer. Although it is in the collective
interest of all to maintain the production quotas, its in the individual interest of
each to cheat without getting caught. But if everyone cheats the cartel breaks down as so
often happened to OPEC.

Polygamy

Consider a society where men and women are in equal numbers and polygamy is practised.
Suppose each man can marry four wives. Then three men will be short of wives. So when each
man gets three wives the competition for women becomes acute. Unmarried women would have
many suitors and dowry would have to be given to the woman by the man and not by the woman
to the man. But there is also the danger that men short of wives will seek to woo even
married women. This will undermine the institution of polygamy. Husbands will have to be
deferential to their wives to prevent them being drawn to other men. But that is not
enough, since unmarried men have a strong incentive to woo even married women owing to the
shortage of women who are not married. So the men have come to an unwritten agreement that
they will not seek the wives of other men.

But while it is in the general interest of all men to follow such a code there is a
strong incentive for an individual to cheat by looking for other women. So it is necessary
to punish severely the women who commit adultery. During the time of Jesus Christ, only
the women who committed adultery were stoned to death and not the men. The institution of
polygamy will collapse unless strict punishments are meted out for adultery. Where such
punishment is not imposed, polygamy cannot be upheld. The men in a polygamous society are
in a conspiracy under which each man restricts his attention to other women in an attempt
to increase the bargaining position of all men to marry four wives. But like in all
restrictive practice agreements, while it is in the general interest of all men to keep to
it, it is the rational calculation of each one that he stands to gain if everybody else
follows the agreement while he cheats.

The cartel then needs legal sanctions, which must be enforced. Polygamy cannot be
sustained as an institution unless adultery is severely punished. This is why in countries
like ours where adultery is not punished by the courts, polygamy is weak and dying out as
an institution with the practice being limited to a small minority.

Gary Becker has explained that many aspects of human behaviour in marriage, divorce and
decisions like having children can be explained by economic theory. Economists work on
incentives to motivate human beings.

It is observed that there is an inordinate delay in hearing and disposing of cases in
our courts. The economist would suggest a reward for judges who hear and determine cases
speedily and some monetary penalty for those who delay disposing of cases beyond a norm.
An economist in USA showed statistically (although there were criticisms of his
statistical methods), that the death penalty was effective in reducing crimes. But it is
even more important that the prospective criminal should calculate that there is a high
degree of probability that he will be detected and convicted too. If not the death penalty
will not be an effective deterrent.

It is said that only half the crimes are successfully investigated and of those charged
in courts, only 7.5% are convicted. This means the probability of punishment for murder is
only about .035%. This is close enough to zero so that a man planning murder might think
he has only a very small chance of being convicted and punished. If we wish to bring down
the crime rate, then a higher rate of conviction is as necessary as better police
investigation and solution of crimes.

Legalisation as an alternative to cope with corruption

Some years ago applicants for passports had to wait a long time to get them. A bribe
speeded the process. A wise Controller of Immigration decided to legalise the corruption
and distribute the enhanced fee for same day issue among the clerks. The issue of
passports since then has been quick and corruption eliminated.

Corruption in the distribution of public goods like education or health care are a
re-introduction of market forces into the provision of these services. There is Dr.
Uswatte Arachchi who bemoans the suggestion to introduce choice in the selection of
schools through vouchers on the ethical ground that it favours the rich and discriminates
against the poor. Perhaps there is some truth in that argument; but the problem already
exists in the system of "donations" and the corruption that prevails in the
admission of children to the prestigious schools. The so-called donations are a form of
reintroduction of market forces to the allocation of education. They bring back the
distortions the original intervention was sought to avoid by free education.

Since education in different schools is not of the same quality  not equally
good, in the jargon of economists free education was never going to achieve its goal of
equality of opportunity for all although some people who did not have access to quality
education before would benefit at least in the beginning of the scheme and others already
in good schools would benefit from the abolition of school fees. Whenever the government
introduces free or below market price education, the price will go back to the market
price for quality education and the poor will be priced out of such market. This is bound
to happen. There are also the costs of the apparatus that must be set up to detect such
corruption by way of all the rules that must be drawn up and the records that must be kept
- the dead weight paper trail.

Principal-agent relationship

Economists have come up with solutions to what is called the principal-agent
relationship, which is common in the economy. The owners or shareholders of a company
appoint a manager and expect him to act in the interests of the shareholder/owners. But
there is no real incentive for the agent to act in the interest of the principal. How to
align the interests of the agent with that of the principal is the problem to which the
economist seeks an answer. So companies have introduced share options for managers who
will then find it in their interest to increase shareholder value by increasing the share
price of the companys share through better earnings which they strive for. This will
benefit the managers of the company since they hold shares bought at a previously
prevailing prices.

Company owners are principals; workers and managers are agents. Owners or principals do
not have complete knowledge of the operations and therefore managers and workers may
pursue their own goals and reduce profits. In fact the agent may even ignore completely
the interest of the owner and follow his own interest only. Employee Share Options is a
way to align the self-interests of the managers with the interests of the shareholders.
But recent corporate scandals in USA have shown that the managers can fudge accounts and
report false profits to boost earnings and with it the share price.

Workers may not work hard and may cheat and steal. The law provides for dismissal in
the case of fraud. But the legal process may impose large and unnecessary costs and hence
may not be economically efficient. Principal-agent incentive problems can be dealt with
through market based contracts. Contract laws must be written to accord with the needs of
the two parties. But sometimes contracts cannot be performed and "fire exits"
must be included in contracts. What is important is to have incentive based management.

The corruption problem

Corruption is a common problem. The economist suggests the designing of incentives for
the bureaucrats to act honestly. The Port Authority has for a long time accepted the
giving of bribes to their staff as more or less normal behaviour. The only solution is to
legalise it.

It is sometimes argued that if bureaucrats were paid adequately there would be less
corruption. The argument is that then even a small chance of losing their job would
discourage them from being corrupt. But what if the probability of losing the job is zero
as in the public sector today. Then however much the salary is raised there is no
incentive to forego corruption. On the other hand if the wages were inadequate to provide
a living for his family the bureaucrat however honest he is will be tempted to resort to
corruption to maintain his standard of living. While this line of thinking tells us
something about paying adequate salaries it doesnt tell us what level of salaries
are required to make the bureaucrat hesitate to take a bribe. But one thing is clear,
given the present situation in the public service where there is no punishment for any
acts of misconduct and where there is no risk whatever, of being dismissed for lapses,
paying higher salaries to public employees will not reduce corruption. It is necessary to
hold them accountable first by dismissing those who steal or pilfer or otherwise
misconduct themselves.

Prison labour

The LTTE calls Sri Lanka a "failed state". John Kenneth Galbraith, when he
was US Ambassador in India, referred to India as an organised anarchy. These descriptions
fit our state and society today. Our prisons are bursting at the seams. Economists would
suggest putting the prisoners to constructive work for the benefit of society. According
to a feature article in the Hindu newspaper some time age, a number of States in USA, have
passed laws that allow commercial organizations to use convict labour. They are easily got
rid of, retrenchments are not a problem, and there is no sick leave, vacation leave and no
overtime payable. And no unions to defy the management. Quality control is made easy and
there are no restrictive practices.

The result is that in the present globalised competition, US Corporations are at an
advantage. Corporations working for profit run privatised prisons in USA. American Federal
and States which run prisons allow  often invite  private enterprises to use
prison labour. Even if the prisons are not private, the State can hold down prison labour
for private gain and its own benefit. China too uses prison labour on an extensive scale.
So its time our authorities use prison labour in productive enterprises at least in
the public sector. The country cannot afford to maintain a large number of prisoners and
they should be made to pay for their keep.